Islamic finance: paying for piety?

UM Financial’s troubles were a rocky start for sharia banking
by Erica Alini

For Canada’s 1.3 million Muslims, UM Financial arrived on the financial scene with a valuable service: mortgages that, in compliance with sharia principles, don’t charge interest. But its failure last year has sparked a fierce debate about whether Islamic banking should be banned, or whether it’s still a potentially lucrative industry in need of better regulation.

Mortgages with UM Financial were set up so that lender and borrower purchased the house together. The homebuyer pays rent to the mortgage issuer (rather than interest), while gradually buying off the outstanding share of the property. Ownership is transferred to the borrower only when the principal is paid in full. But when UM Financial failed, receivers were left with a legal can of worms. Who ultimately owns the houses—the bank or the borrower? And will 170 Muslim borrowers be forced to start paying interest in order to keep possession of their homes? Long-time critics of Islamic finance say these problems are inherent in the system and that it should be outlawed. Tarek Fatah, founder of the liberal-minded Muslim Canadian Congress, argues sharia-based banking amounts to calling interest by another name, and charging gullible, if devout, borrowers a premium for their piety.

Proponents of sharia-based finance maintain that the failure of UM Financial proves that Canada needs more, not less, Islamic finance. Had the country’s big banks opened up to the practice, borrowers would not have turned to a small, poorly regulated player such as UM Financial, says Walid Hejazi, a business professor at the University of Toronto’s Rotman School of Management. In retail banking, sharia-sanctioned models are examples of low-risk, back-to-basics finance, notes Hejazi. On the commercial side, a well-developed Canadian regulatory system for Islamic ﬁnance would make it easier for wealthy Gulf countries to invest in capital-intensive projects that need funding, such as the development of Alberta’s oil sands.

UM’s troubles were a rocky start for Islamic finance. But they likely won’t be the last word on a system that will remain in demand with a growing part of the population.